Has the Government doubled the budget deficit?

Treasurer Joe Hockey is the "Masterchef of cooking the books" according to his Opposition counterpart Chris Bowen, who has repeatedly accused the Coalition of using "voodoo economics" to create a sense of crisis to justify dramatic spending cuts in the May 13 budget.

"Now what's happening here is that Joe Hockey has doubled the deficit, adding $68 billion to the deficit by changes to Government spending and changes to Government assumptions, and now he's asking the Australian people to pay for it", Mr Bowen told journalists in his electorate on April 27.

ABC Fact Check examines whether this statement is correct.

The claim: Chris Bowen says Joe Hockey has doubled the deficit by changes to Government spending and changes to Government assumptions.

The verdict: Since the election, the official forecast deficit has doubled. The economic assumptions are different from those used before the election, and spending decisions have been made that were not in the previous forecasts. Mr Bowen's claim checks out.

Two sets of forecasts

Mr Bowen's office told Fact Check the statement was based on differences between two budget forecasts, one prepared before the Coalition came to power and one prepared afterwards.

The first, the Pre-Election Economic and Fiscal Outlook (PEFO), was released in August by Treasury. It was based on a "no policy change" scenario, using assumptions and fiscal rules underpinning medium-term projections adopted by the former Labor government.

During a Senate Estimates hearing in February, Treasury Secretary Martin Parkinson was asked whether forecasts and projections in the MYEFO were ultimately the decision of Treasury or Government. He replied: "It is always a decision of Government. PEFO is the only document that the Treasury and the Department of Finance have their names on. In fact, it is not even Treasury and the Department of Finance; it is the two secretaries. All other documents are documents of the Government."

Both forecasts contain figures for the standard budget projection period, known as the forward estimates period, which is four years.

Has the deficit doubled?

The August PEFO said the underlying cash balance in 2013-14 would be a deficit of $30.1 billion. The following year's balance would be a $24 billion deficit, and in 2015-16 a $4.7 billion deficit, before returning to a surplus of $4.2 billion in 2016-17.

These forecasts total a deficit of $54.6 billion over the four-year forward estimates.

The December MYEFO estimated the underlying cash balance for 2013-14 would be a deficit of $47 billion. The projections for the following three years were deficits of $33.9 billion, $24.1 billion and $17.7 billion.

These total $123 billion over the four years of the forward estimates.

The difference between the two projections is $68 billion. The combined projected deficit in the coalition's MYEFO is more than double the corresponding number in the PEFO. Mr Bowen is correct on this figure.

2013-14

2014-15

2015-16

2016-17

Total

PEFO (August 2013)

-30.1

-24

-4.7

4.2

-54.6

MYEFO (December 2013)

-47

-33.9

-24.1

-17.7

-122.7

Difference

-16.9

-9.9

-19.4

-21.9

-68

Have there been changes to Government spending?

The MYEFO released by the Government states that since the 2013 PEFO, policy decisions, which includes spending and revenue decisions, has had a $13.7 billion negative impact on the underlying cash balance over the forward estimates.

In relation to spending, the MYEFO said: "Essential steps have been taken to address unresolved issues inherited from the former Government, which have contributed to the deterioration in the budget position since the 2013 PEFO."

This includes:

spending measures associated with repealing the carbon tax ($2.8 billion over four years);

land transport infrastructure programs ($5.6 billion over four years);

implementation of border protection policies ($2.1 billion over four years of which government says $1.2 billion is directly attributable to insufficient funding provided previously for the PNG and Nauru facilities);

a boost to funding for the Students First package ($1.2 billion over four years); and

an $8.8 billion grant paid to the Reserve Bank of Australia.

MYEFO states deterioration of about $2.9 billion was attributed to removing what is described by Mr Hockey as "uncertainty" in relation to about 100 announced, but unlegislated, tax and superannuation measures. Mr Hockey maintains that the budget "blow-out" Labor keeps pointing to is a direct result of the Government needing to fix inherited problems and paying for policies initiated but not legislated for, under the previous government, rather than it being all new spending. He also says the Government has brought forward new spending that Labor "buried" beyond the four years of the forward estimates. Labor disagrees.

The most significant single payment across the four years is a grant of $8.8 billion given to the RBA this financial year.

While that payment was clearly made by the Coalition, there is debate about whether the cost itself was new, or whether it was money that should have been paid to the Reserve Bank while Labor was in government.

Mr Hockey told the ABC Insiders program on April 13 that: "The $9 billion should have gone under Labor... when they took out dividends from the Reserve Bank..."

The Opposition maintains it was never asked for a lump sum payment of that size and released formal advice from Treasury to then treasurer Wayne Swan in April 2013, which warned that a cash grant could trigger market speculation about the RBA's stability and stated that there was no legal basis to make a capital injection. The Opposition has also said the Government's decision to provide $8.8 billion to the RBA was not in response to a specific request from the bank.While the payment should be considered as new spending, it is worth noting that while the RBA did not make a formal request for a cash grant, Governor Glenn Stevens told the Standing Committee on Economics in February 2013 that the RBA would have preferred that Mr Swan had not depleted the bank's capital by withdrawing $500 million in dividends ahead of schedule to pay down the government deficit.

Other spending measures - such as on land transport infrastructure, and compensation measures associated with repealing the carbon tax - are examples of spending that would not have been required under Labor policies.

It is clear that changes to Government spending have contributed to the doubling of the deficit.

Have the economic assumptions changed?

The MYEFO said that over the forward estimates a $54.3 billion deterioration in the projected combined deficit since the PEFO was caused by "parameter and other variations" changes.

These included:

changes to the parameters for determining tax receipts, which will result in the government receiving $37.8 billion less over the forward estimates than forecast in the PEFO;

a change to the terms of trade methodology, reducing economic growth forecasts, causing a $2 billion hit to the bottom line over the forward estimates;

a change in the projected unemployment rate, leading to higher benefits payments totalling $3.7 billion extra

Mr Bowen accurately quotes the MYEFO in stating that the economic assumptions have changed, with a resulting negative effect on the budget deficit.

The biggest single change between the PEFO and the MYEFO is the projection that lower government revenue from tax will add $37.8 billion of the $68 billion increase to the deficit over the forward estimates, which is approximately 55 per cent. Thanks to a gloomier outlook for economic growth, the MYEFO contains downward revisions to forecasts of wage growth and corporate profitability.

"A softening in the economic outlook has resulted in significantly lower nominal GDP, which has largely driven the reduction in tax receipts by more than $37 billion over the forward estimates," the MYEFO said.

The changed outlook is reflected in these reductions in forecast growth in gross domestic product for the forward estimates in the PEFO and the MYEFO:

2013-14

2014-15

2015-16

2016-17

PEFO (August 2013)

3.75%

4.5%

5.25%

5.25%

MYEFO (December 2013)

3.5%

3.5%

4.75%

4.75%

The main difference between the PEFO and the MYEFO was a more pessimistic view about the impact on the economy of the end of the mining investment boom. The MYEFO said the fall in resources investment was expected to be sharper than previously forecast, while recovery in the non-resources sector was expected to be more gradual.

Are they 'Government' assumptions and projections?

Since the MYEFO was released in December, Labor ministers have repeatedly stated that the economic assumptions were "deliberately" adopted by the Coalition Government and Mr Hockey in order to manufacture a budget crisis. In his April 27 press conference, Mr Bowen said the projections were based on the Government's assumptions: "Not even the Treasury or Department of Finance's assumptions; [Mr Hockey's] own personal forecasts as the Treasurer of Australia," he said.

It is difficult to ascertain whether Mr Bowen has specific knowledge about what information passed between Treasury and Mr Hockey, and how much influence each had on the downgraded forecasts for economic growth. This change underlies the doubling of the deficit.

Reviewed by the panel

This piece has been reviewed by ABC Fact Check's economic advisory panel.

Mr Hockey has repeatedly rejected Labor's allegations by telling Parliament that the Government relies on economic projections modelled by Treasury.Mr Hockey said in Parliament on March 18: "The fact of the matter is that we want to have the most accurate forecast possible; that is what Treasury recommended, and that is what we accept," he said.

He suggested Labor was to blame for the need for changed assumptions. "The methodology that they [Treasury] have used in MYEFO actually confirms the fact that Labor left the legacy of increasing deficits to $123 billion..."

He also suggested Labor' growth forecasts had been too optimistic, saying Labor had "no sense of shame that they left a slower economy".

As set out above, Treasury Secretary Martin Parkinson says forecasts and projections in the MYEFO are ultimately decided by the Government.

The verdict

The MYEFO forecasts a budget deficit twice as large as it was in the PEFO. The economic assumptions in MYEFO are different from those used in the PEFO, and there is spending in the MYEFO that was not in the previous forecasts.

It remains to be seen how the two sets of forecasts stand the test of time, but as of today, Mr Bowen's claim checks out.

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